A government consumer watchdog wants to stop builders from ripping off leasehold home buyers.
The Competitions and Markets Authority (CMA) wants four of Britain’s largest house builders to show they are not mis-selling leasehold homes and imposing unfair terms on ground rents – and is threatening enforcement action if they have broken the rules.
Millions of homes – mainly flats and new houses – are sold as leaseholds with many snapped up as buy to lets by landlords.
The problem has rumbled on for more than 50 years but despite stronger leaseholder rights, little seems to have changed.
What’s the leasehold scandal about?
The latest move in the leasehold row comes from the government-backed CMA.
The CMA has written to four leading house builders demanding details of the terms and conditions that go with their leasehold contracts to prove they have not mis-sold the contracts and that ground rent charges are fair and reasonable.
The builders under scrutiny are:
- Countryside Properties
- Barratt Developments
- Taylor Wimpey
- Persimmon Homes
Other house builders have received written warnings urging them not to break consumer protection laws and to overhaul how they sell leasehold homes.
The CMA also explained their inquiry is at the evidence gathering stage and that they have not yet accused any builder of wrongdoing.
Leaseholds and ground rents explained
Homes and land in England and Wales can be owned in several different ways. The legal term for this is tenure.
The main types of tenure are:
- Freehold – A freeholder owns a building and the land it stands on
- Leasehold – A leaseholder rents or leases a property for a fixed term. At the end of the lease, ownership reverts to the freeholder
- Commonhold – Ownership that allows owners of apartments to club together to own the block their flats are in rather than taking on a leasehold
A leasehold contract generally runs for 99, 125 or 999 years. The term begins when the first leaseholder signs the contract but does not reset if a new leaseholder moves in.
Some leaseholders have an option to buy the freehold, but the shorter the lease the higher the price.
If the term falls below 80 years, banks and building societies are reluctant to lend if a leaseholder wants to remortgage or a buyer wants a mortgage.
The most common leasehold charges besides ground rent are:
- Service charges
- Administration fees
- Permission fees
Service charges are a leaseholder’s contribution to the running costs and maintenance of a building. They include building insurance, repairs, cleaning shared areas, like stairs and hallways.
Administration fees relate to one-off events, like approval to carry out building work.
Permission fees are paid to a freeholder when a leaseholder wants to sublet their home, take in a lodger or keep a pet.
Scope of the leasehold problem
Government data estimates that 4.3 million residential properties in England and Wales are leaseholds.
In 2018, a quarter of home sales (24%) were leaseholds, according to the Ministry for Housing, Communities and Local Government.
More than two thirds of leasehold homes – 69% or nearly 3 million homes – are apartments.
As developers build flats to maximise revenue from a site, most apartments are in urban areas.
More than a third of new build sales were leaseholds in 2018 (35%).
Leaseholders pay an annual ground rent as a fee for use of the land they stand on.
The CMA says 12,000 have contracts that double their ground rents every 10 years.
A House of Commons briefing paper Leasehold and Commonhold Reform gives an example of a leaseholder paying ground rent of £295 a year on a home worth £200,000 when the contract starts, with the ground rent rising to £9,440 a year 50 years later.
Buying the freehold could cost at least £35,000, wiping out the savings on ground rent for years.
Meanwhile, builders sell their ground rent rights to investors for up to 35 times their current value, freezing leaseholders out of buying their freehold, says the paper.
The CMA argues escalating ground rents are unfair to leaseholders and if an investigation confirms builders have broken the rules, enforcement action will follow.
Alongside the ground rents scandal, the CMA is also looking at allegations builders have mis-sold leasehold homes.
The CMA says:
- Builders failed to explain to homebuyers how ground rents work and how much they may increase over time
- Home buyers were told they could only buy on leasehold terms and that freeholds terms were unavailable despite freehold sales to other buyers on the same sites
- Builders misled leasehold buyers about the costs of later buying their freehold, with some quoted a low price that later increased by thousands of pounds
- Sales staff bullied buyers into signing contracts by setting short deadlines to pressure them into buying homes they may not have bought if they had more time to think about the deal
Another aspect of the inquiry looks at how leasehold increases are calculated. Developers tend to set ground rent rises against the Retail Price Index, which records inflation at a higher rate than the Consumer Price Index, the government’s official cost of living measure.
Andrea Coscelli, CMA Chief Executive, said: “It is unacceptable for housing developers to mislead or take advantage of homebuyers. That’s why we’ve launched enforcement action.
“Everyone involved in selling leasehold homes should take note: if our investigation demonstrates that there has been mis-selling or unfair contract terms, these will not be tolerated.”
How much does buying a freehold cost?
Working out the cost of buying a freehold or lease extension is tricky and depends on a lot of factors.
Professional valuers can do the calculation, but for a general indication, take a look at a free leasehold calculator on the Leasehold Advisory Service web site.
This table gives an example of the costs of extending a lease and the value an extended lease adds to a home:
Leasehold Advisory Service/ Moneysavingexpert.com
Restrictions on lease extensions
The Leasehold Reform Act 1993 says a leaseholder who has owned their property for no less than two years is entitled to get 90 years added to their lease term at a fair market price.
The rules are different for leasehold houses. Instead of a 90 year extension, the extra term is 50 years, although freeholders can add more to the term if they want. House owners tend to buy their freeholds rather than extend their leases.
Leasehold reforms in pipeline
Meanwhile, as the dispute continues, the government has promised to protect homebuyers from unfair contracts and has asked the Law Commission to draft recommendations for reforming the leasehold housing market.
The commission reported in July and recommended that new leaseholds for flats should be abolished in favour of commonholds, which give property owners rights over land and come without ground rents.
They also want an easier process for current leaseholders to buy or extend their leases.
The government has pledged to reform the market, but action has been relegated to the back-burner due to Brexit and the impact of the coronavirus pandemic eating into Parliamentary time.
Besides reforming the leasehold system, the plan is to ban leaseholds, restrict ground rents to a peppercorn value – in real terms zero or a notional payment – and to set up a redress scheme compulsory for developers to join which will handle complaints of unfair charges from leaseholders.
“The government is proposing to extend mandatory membership to a redress scheme to all freeholders of leasehold properties and will introduce primary legislation to this effect as soon as Parliamentary time allows,” said a housing ministry spokesman as long ago as 2017.
When the government reforms leasehold home sales, the new law will only apply to England despite the current law covering England and Wales.
In Wales, builders have agreed not to sell leasehold properties under Help to Buy – Wales unless ‘absolutely necessary’.
The law in Scotland operates differently and few homes are sold as leaseholds.
Why don’t builders offer commonhold tenure?
The House of Commons briefing paper suggests builders do not offer commonhold tenure because there is no financial advantage in the deal for them.
With no ground rents to collect or sell to boost revenues, commonhold offers little attraction to housebuilders.